The age of austerity is ending

February 28, 2013

Whisper it softly, but the age of government austerity is ending. It may seem an odd week to say this, what with the U.S. government preparing for indiscriminate budget cuts, a new fiscal crisis apparently brewing in Europe after the Italian election and David Cameron promising to “go further and faster in reducing the deficit” after the downgrade of Britain’s credit. But politics is sometimes a looking-glass world, in which things are the opposite of what they seem.

Discussing the outcome of Friday’s “sequestration” of U.S. government spending is best left to the month ahead, when we see how the public reacts to government cutbacks. But in Italy, Britain and the rest of Europe, this week’s events should help convince politicians and voters that efforts to reduce government borrowing, whether through public spending cuts or through tax hikes, are both politically suicidal and economically counterproductive.

In Italy, and therefore the entire euro zone, this shift is now almost certain. After the clear majority voted for politicians explicitly campaigning against austerity and what they presented as German economic bullying, further budget cuts or labor reforms in Italy are now off the agenda, if only because they would be literally impossible to implement. If Angela Merkel demands further budget cuts, tax hikes or labor reforms as a condition for supporting Italy’s membership of the euro, a majority of voters have given an unequivocal clear answer: Basta, enough is enough. Most Italians would rather leave the euro than accept any further austerity – and if Italy left the euro, total breakup of the single currency would follow with an inevitability that might not apply if the country exiting were Greece, Portugal or even Spain.

Merkel surely understands this, and she is determined to avoid a catastrophic euro crisis just before her own election in Germany on Sept. 22. She is therefore almost certain to heed Italian voters’ refusal to accept further tax hikes, budget cuts or labor reforms. From now on, the European Central Bank will have to offer its support to Italy without any tough pre-conditions. In fact, Italy can realistically be expected to make only one economic promise: to maintain the existing taxes and reform laws already legislated under Monti. That promise should be easy enough to keep, since Italy’s new parliament will be no more able to muster a majority for repealing old laws than for introducing new ones.

The European Commission, meanwhile, can move the fiscal goalposts in Italy’s favor. Once that precedent is set for Italy, similar flexibility should spread across the euro zone – and at that point the ECB would be able to offer effectively unconditional guarantees of financial support for all members of the euro zone, while Merkel and German voters turn a blind eye. Once investors work all this out, European financial markets can be expected to calm down and Italian politicians to return to what they know and love: plotting, backstabbing and Machiavellian intrigue.

Turning to Britain, we can see a similar paradox. Last Friday’s credit downgrade is actually likely to relieve austerity in two distinct ways. First, the downgrade should ensure that sterling remains weak, as the Bank of England and Treasury have long been praying. This will help, if only at the margin, to boost manufacturing and exports. More important, the downgrade will shake up British politics and economic policy.

Even before the downgrade, the pound had fallen back to the level of $1.51 where it traded in 2010 when Gordon Brown was still prime minister, but many investors viewed this as a temporary dip. Now the weakness of the pound is likely to prove longer-lasting, thanks largely to the credit downgrade.

The main reason for the pound’s unwelcome strength since the 2010 election was that Britain came to be viewed as a safe haven of financial and political stability in a sea of European chaos. As a result, vast amounts of flight capital poured into sterling. The credit downgrade will not automatically reverse these flows, but it will draw attention to a shift in British politics and policy that many international investors had until recently ignored: Britain is moving into a period of political, fiscal and monetary turbulence, just as political and financial conditions in the rest of Europe are becoming more stable.

With only two years to go before the next general election, the British economy shows few signs of sustained recovery, living standards are falling and the government is missing all the deficit and debt targets by which it asked to be judged. With other credit-rating agencies expected to follow last week’s downgrade from Moody’s, British voters will be repeatedly reminded of these failures. The governing coalition of Conservatives and Liberals, whose platforms agreed on almost nothing apart from the overriding necessity of deficit reduction, will be strained almost to the breaking point.

With an election just two budgets away and a radical new governor arriving at the Bank of England amid intense public expectations, a shift of policy away from austerity always seemed likely in the second half of 2013. Until last week, however, a major deterrent to policy U-turns was the fear of losing Britain’s triple-A credit rating. With that totem now demolished, Cameron has less reason than ever to persist with policies that are not only politically suicidal but economically counterproductive – and are coming to be recognized as such in Europe, as well as in America, Japan, China and indeed the world over. Things may not look that way just yet, but the age of fiscal austerity should soon be over.

PHOTO: German Chancellor Angela Merkel waits for the arrival of Italian President Giorgio Napolitano at the Chancellery in Berlin February 28, 2013. REUTERS/Thomas Peter

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Interesting opinion. I would say more that a global backlash is occurring and may only be temporary (3-8 years?) instead of an age ending.

Posted by tmc | Report as abusive

Your opinion has a strong base in reality… lack of pressure on Italian bonds, leniency for Portugal and Ireland, growth measures in Spain, ‘solidarity’ for cyprus… blah, blah… I wonder though… in terms of real-world-consumer-based-economy… whether bleeding will stop. It’s a really ugly wound; much is dependent on external factors. Perhaps it would be for the best…, a catalysing event (or two) that would rid the world of these atavisms.

Posted by satori23 | Report as abusive

Good grief.

“…this week’s events should help convince politicians and voters that efforts to reduce government borrowing, whether through public spending cuts or through tax hikes, are both politically suicidal and economically counterproductive.”

If it does, then “politicians and voters” are even more stupid than they look. What part of “unsustainable”, a description of America’s (and Europe’s) present economic course responsible economists agree on, do you not understand?

“European financial markets can be expected to calm down and Italian politicians to return to what they know and love: plotting, backstabbing and Machiavellian intrigue.” I think anyone blind, deaf and dumb that thinks American (or other) politicians are any different, as you imply.

I, too, wonder, along with @satori23, “…in terms of real-world-consumer-based-economy… whether bleeding will stop.” We’re not really talking about minor “bleeding”, but fiscal hemorrhaging of a volume that will be fatal if NOT stopped. Failure is NOT an option!

Posted by OneOfTheSheep | Report as abusive

Lira will work much better for Italy.

Their devaluation “secret weapon” worked well for 50 years, will do it again.

Posted by robb1 | Report as abusive


Austerity is a failure… more than impressive one… in terms of social cost, real-world-debt-to-GDP ratio… and blah, blah. By now, there really should be (perhaps there even is) consensus on that one… There’s even bigger flaw in push to competitiveness, but that’s all part of the same package.

It can all be quite amusing, to an extent, as in fact that huge effort to shield/please investors hurts investors.

I don’t think that results of Italian elections, namely that new political force (citizens representing citizens? what an odd thing, eh?), is a bad thing. It’s good that there’s channeled vent for the accumulated rage and people who question basics of our social contracts should be welcomed, instead of scorned by the media.

This Troika that’s running around the world telling folks they should work longer and harder for less money is real danger. I’m fine with threat they represent to themselves, but the collateral is unacceptable.

Have fun,

Posted by satori23 | Report as abusive

Being more religion than science, optimistic economic prediction is as good as any, but it seems to me that the initial collapse was a fore-shock and not rupture. Also, the strain-energy or bubble is still building with an International Government-supported pissing-contest of large, above-the-law, Monopolies, Vulture funds, Banks, and Traders hording wealth and resources and inflating commodity prices. The symptom of this increasing strain are the continuing increase in wealth disparities and Public/Government debts.

Posted by ConstFundie | Report as abusive

Spend more money you don’t have and that will save us?? Are you kidding me? More conspiracy theory $%!+ about evil corporate empires controlling governments and commodity prices. Sorry, but it is way simpler than that. I see it every day – a world full of people who expect to get something for nothing. Max out your credit card and get that second mortgage so you can go on another vacation and buy more toys. Pathetic work ethics and the expectation to bailed out for all your financial sins. That sort of mentality, from the Walmart greeter to the Wall Street broker, is what has brought much of the world to financial ruin. I accept the fact that focused government investment in infrastructure and basic services that are better served collectively, can help build an economy, but without fiscal discipline, we all end up in debtor’s prison as the value of our currency erodes and monetary inflation destroys the savings of those who actually are not leaping off the spending cliff like the other lemmings.

Posted by AuAgExpl | Report as abusive

But will Merkel and her northern tier colleagues be willing and able to turn a blind eye to rampant deficit spending in Italy and in the rest of Europe in an election year?

How long can she hand out vast amounts of German money to the rest of Europe and/or cosign for the sovereign loans of other nations that are already drowning in debt when she knows full well that it will never be repaid?

How long will the good citizens of the northern tier stand for it?

Posted by breezinthru | Report as abusive

There’s certainly need for structural change. Top-down would be better than bottom-up approach though. It’s a poor set-up nevertheless… competitiveness; who with the right mind would compete in the race to the bottom and what sort of market awaits us there? We’ll need to do better than that…

Germans are basking in crisis; now they expect far away markets to pick the tab for failed European experiment. Poor bet… those pollsters (ZEW) should get off the euphoriants.

In actuality lemmings don’t jump off the cliffs… US administrators do.

Take care,

Posted by satori23 | Report as abusive

More surprising than the general acceptance of ever-higher debt loads is how deficit spending, as a means of stimulating the economy, seems to be losing its potency. For all of the deficit spending and all of the quantitative easing by central banks, the global economy still teeters on the brink of recession.

Posted by Pete_Murphy | Report as abusive

You’re right @OOTS, it is unsustainable. No question about that. But we still don’t have an answer. The US was able to soften the blow of the ’07 financial collapse. Other countries were not so lucky. Due to their situation austerity was really the only immediate option as other solution would take longer, as they have. I too believe Anatole to be overly optimistic, bordering on a “confidence man”, but I don’t think so. I think he is honest and forthright with his opinions. So, looking at the results of applying austerity across various nations has show that it has significant side effect that honestly if applied in the US would be disastrous. Joe and Jose Sis-pack tend to get violent when someone tries to take something away form them, or if they feel slighted in any way. Think about it @OOTS, read the comments on the main stream media sites on any article on race, guns, religion, and immigration and see the out-right animalistic violence they exude. I think we should come up with a different plan. One that keeps Joe and Jose off the trigger, and Bible-thumping gun toting rednecks with a full six-pack and something to shoot beside me.

Posted by tmc | Report as abusive

regressive social engineering>curiouser and curiouser deflation>austere rise of the debt>self-immolation >compulsory labour>protests>food banks>global maelstrom…

it’s all for the best…

till later,

Posted by satori23 | Report as abusive

“Being more religion than science, optimistic economic prediction is as good as any, but it seems to me that the initial collapse was a fore-shock and not rupture.”

@ConstFundie, you’re spot on.

The author of this article is a devout optimist who preaches optimistic economics in various forms.
As far as Europe is concerned, the problem has crossed the line between economics and politics. In other words, there is no combination of fiscal and monetary policies that any EU member country or EU organization can implement that would save the euro currency or prevent the euro zone from breaking apart.
That have have been possible two years ago, but it no longer is.
It’s time for major political corrections in Europe, and the results of the Italian elections offer a clue about where things are going.

Posted by reality-again | Report as abusive

policymakers should be building public hydroponic gardens where people can grow/pick food for free, they should set decent minimum wage on global scale and reduce working hours, they should deliver 3d-printers and free internet to each household…, and generally get their act together.

current administration, on global scale, deserves to be fired.

Posted by satori23 | Report as abusive

This guy preaches to the choir of relativist thinkers in that there is no morality to human interaction – only manipulation. I think however that manipulation only goes so far before normal people wise-up to it. Less intriguing but more honest is to have people get what they have earned. They do not feel tricked and begin to rely on honest dealings and may treat others the same. I know this sounds pollyannaish but if pundits would not write of alternative quick fixes that are equally so some headway might be made.

Posted by keebo | Report as abusive


It has been said that those who complain without suggestions for improvement waste of everyone’s time. That’s why most of my posts suggest at least one “way forward”.

To paraphrase another saying, “you can present a person with wisdom, but you can’t make them “think”. That part of any “solution” only they can initiate.

I have long been amazed at the lengths people will go to avoid making and being responsible for personal choices. Even not making a decision has effect(s), some good, some bad.

Posted by OneOfTheSheep | Report as abusive

I hope you are wrong, a return to unsustainable budget trajectories will create a very dark future within the next ten years. Without some budget controls the EU will split up. Germany cannot give Italy endless bailouts, and the bond market status quo is unlikely to continue. And in the US, the cuts from sequestration will cause pain because they were designed to. The White House can leverage this for political gain all it wishes, but that does not change the fact that these cuts are only a meager step towards debt stabilization. If you think things are bad now, wait until the fed has no choice but to raise interest rates. Then we will have to drastically raise taxes and deeply cut social benefits just to pay the bond holders, many of which are pension funds and ordinary citizens.

Oh, and for Merkel, another Euro crisis would be better politically then putting Germany on the tab for bailing out countries with lower taxes and better benefits then the Germans get.

Posted by agsocrates | Report as abusive

happy days are here…can you spare $20 for a cup of Starbucks..?

Posted by rikfre | Report as abusive